Tips for buying a 1 or 2 bedroom investment property

Wayne was recently asked about tips for buying a 1 or 2 bedroom investment property. This is his reply.

From a sales perspective, the market is holding up well – unexpectedly so in my view, given the economic gloom and doom on so many levels.  The upside factors are probably related to: low supply (transactions down 30% to 40% compared to last year), lower interest rates plus riskier investment alternatives.  That said, is hard to make a case for prices to be higher at the end of the year than they are now, so I’m suggesting there isn’t a rush to buy.

I really don’t know about other areas compared to the Lower North Shore where we work.  Planned changes to infrastructure etc are a leading indicator to local prices.  For example, the Crows Nest metro station will open in 2023 and should be a factor for price growth within its catchment area.

Some purchasing suggestions for ‘type’ of properties:

  1. Remember one bedroom properties need to have a higher gross return compared to 2 bedrooms as there are higher fixed costs for them – ie. council, water rates, landlord insurance, accountancy costs are identical for 1, 2 or 3 bedroom strata properties.  Repairs are mainly related to the kitchen, bathroom, entrance door etc so costs are similar, regardless of the number of bedrooms. Strata fees are property-size related, but again are relatively more costly for smaller properties.
  2. Look at buying poorly presented properties.  Styling gets higher prices, so perhaps look for the right fundamentals in a vacant or tenanted property.  Properties with unexpired leases are less attractive to owner occupiers, so consider them, even if the rent is below market. These things, plus uncooperative tenants, will also put off other investors and the reduced income is only temporary.
  3. Always look to improve a property before renting.  Tenants don’t pay for potential.  If you pay $800,000 for an ‘improver’  then your rent may be $500 per week and costs may be $100+ per week.  This is about a 3.2% gross return and 2.6% net.  Spending $50,000 on an improvement should deliver at least an extra $100 per week in rent. This is a gross return of 10% on the $50,000 and the net is about the same (only difference is the agents commission on the $100pw).  Depreciation is a major benefit that many people forget to organise and of course the improvement and scrapping of the original gives a big boost to net income in the early years.
  4. Always, get the vendor to agree to give you the marketing photos and floorplan etc before you agree on the price.  It costs them nothing to give them to you, but very often afterwards they say no.  The same goes for arranging access to the property before settlement, either to arrange quotes for the improvement or to start showing prospective tenants through.  Again, free to provide, but often extremely difficult to arrange after the contract is signed.
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